Property starts year on shaky foundations

PROPERTY STOCKS look set to extend the abysmal run which made them one of the stock market casualties of 1998 into the new year, say City analysts.

Fears that the slowdown may cause a sharp downturn in the highly cyclical property market sparked a wave of selling in developers' shares in the past 12 months. The sector now trades at a 25 per cent discount to its members' net asset value (NAV) - the value of the buildings owned by developers - compared with a premium of 20 per cent 12 months ago. Analysts expect this undervaluation to increase further in 1999, and forecast a discount of 30 per cent by 2000.

The position is even gloomier for smaller developers. Some of the 100- plus minnows quoted on the London market are on discounts to NAV of over 40 per cent, making them ideal targets for takeover or management buyout.

Part of this underperformance is due to investors' pessimistic view of the property market in the near term. Rental and property values - key indicators of profit growth - are expected to remain flat across the market in 1999.

However, industry experts believe the downturn will be less dramatic than in past recessions, and few expect a repeat of the 1980s crash. "The huge difference this time is that there aren't huge swathes of developments about to hit the market," one analyst said.

Some sectors are expected to weather the downturn. Hugh Rich at Charterhouse Tilney favours developers with large out-of-town retail properties. With planning regulations on shopping centres set to become tighter, companies with existing developments will dominate the market, he feels. Mr Rich selects Capital Shopping Centres, Pillar, Grantchester and Capital & Regional as retail developers to watch. Industrial properties in the South-east are also likely to see an upturn, making companies such as Slough Estates a good punt.

The other bull point for small developers will be industry consolidation. "A number of fund managers are really fed up with the underperformance and will push for corporate action," one analyst said.

The City's hot tips for takeovers are Allied London and Chesterfield. Greycoat, the City of London specialist, is among the targets, and even Hammerson could attract interest from foreign suitors.